Daily Archives: September 8, 2010

Avoid Foreclosure With Non-Bankruptcy Cramdown?

Is your home worth less than what you owe on the mortgage, or mortgages?

That is called:  underwater.

This encourages people to stop paying and let mortgage foreclosure happen, even if they can afford the payments.

In Michigan now, for homes that have a mortgage more than half are underwater.

Tune I have been singing for a while, if you are current on your house payment, the mortgage companies have one hand in your your back pocket getting bailed out with your tax money, and the other in your front pocket getting that payment.

Many people are staying as long as they can in their underwater home, for free, then walking away, the so-called “strategic default,” and let the mortgage foreclosure process play itself out.

They leave after, or just before, foreclosure.

In the vast majority of mortgage modifications, there is no lowering of the principal balance, the amount you owe on the house.

Most of the ones that are done fail anyway, and foreclosure takes place.

The mortgage company merely changes how you will pay back the amount you owe, maybe extend it out to 40 years, temporarily lower the interest rate.

And you cannot refinance with today’s lower rates, because there is no equity in your home.

Allan Sloan of Fortune magazine reviews a proposal by Keith Gumbinger of HSH Associates mortgage consulting firm, for a sort of cramdown for people  CURRENT on their mortgage payments.

Of course, it starts talking about how the government bailed the mortgage companies out of the housing bubble collapse, and there are government programs for people behind on their house payment, what about the poor guy who kept paying even though his equity disappeared?

My view:  two wrongs don’t make a right.

One more beat of the drum:  judicial mortgage modification.

Back to the proposal:

The government (the taxpayers) will provide “value gap coverage.”

The amounts below are base on what has happened in Michigan.

You bought your home at the peak, 2005-07, and financed 100%, maybe more.

No down payment was made.

Average home in Michigan is down 50%, so if you purchased it for $200,000, it is now worth maybe $100,000.

The balance is close to $200,000, call it $190,000.

Under the proposal, you get a new mortgage for $190,000 at current market rates.

Uncle Sam (the taxpayer) guarantees the difference, between the current value, and the new mortgage amount to the mortgage company.

You are not likely to strategically default because your payments will be lower.

Supposedly, this keeps another home from being foreclosed, which would increase supply which lowers demand, and so, price.

The full cramdown proposal is here.

What do you think?

Avoid Foreclosure With Non-Bankruptcy Cramdown?

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